Oil Balances Look Even Tighter for 4Q18

Strong global economic growth is being confirmed for 2018, although rising world trade tensions is at the top of the list of risks for 2019. The overhang of unsold sweet crude in the Atlantic Basin that had been weighing on Brent prices and structure is now starting to clear up. And oil balances look even tighter for 4Q18. We still expect Iranian export losses to be substantial (taking out 1.4 MMB/D by November) with the reinstatement of U.S. oil sanctions. Saudi Arabia has been reining in crude supply (at 10.2-10.3 MMB/D for August and September), and output is expected to increase in 4Q (we assume 10.6 MMB/D) as Iran losses mount. Saudi will work to manage Brent prices in the $70-80/Bbl range. Demand growth is set to stabilize at around 2.0 MMB/D in 3Q and 4Q, following a dramatic slowdown in 2Q. Political risks to supply remain high in the Middle East and elsewhere. Overall, crude stocks in the three major OECD markets (U.S., OECD Europe, and Japan) draw slightly in September and build in October, at the peak of refinery maintenance season. However, draws will be substantial in November and December.

Old Production is Weighing Down Markets, Even as Some Slightly Newer Ones Recover

With all the new liquefaction projects coming online, one must also consider the age of the existing fleet. This is a natural headwind to global LNG production growth in the form of old and waning production. There are 5 countries with capacity that is older than 30 years old, representing 20% of existing capacity: Libya, Brunei, United Arab Emirates, Indonesia, and Algeria - with combined capacity 3% higher than the total capacity of Qatar at nearly 80-mtpa.

India’s economic growth and oil demand to stay resilient

India’s recent data releases have sent conflicting signals about the economic outlook. Physical activity indicators, including GDP and vehicle sales, have been solid. However, indicators regarding the external sector have been sluggish, and the Indian currency has weakened sharply. In the U.S., China, and Germany, confidence indicators for August pointed to improvements.

The Price Rally Reignites in August, Driving Time Spreads to Questionable Levels

The market rally has reignited in August, with Sept-18 contracts in NW Europe closing at the highest level seen for a Month Ahead contract in many years. This is in spite of the fact that we’re still experiencing relatively low summer demand with no cold weather on the forecast for September and October. Markets remains on edge as overall storage stocks haven’t rebuilt their year-over-year deficits any further since June, and the wider commodity complex, particularly in the case of EU ETS carbon, remains robust. However, storage stocks would be able to rebuild on a soft start to winter, and we highlight that the higher Q1-19 prices rise, the harder they could fall.

USGC Propane makes price gains

Front-month non-LST propane gained 3% over the week, ending the week at 104.13 cents/gal. The spread between FOB propane widened by 7.4% over the week, as export demand continues to pull on USGC propane. US propane/propylene stocks rose by 2.56 million barrels during the week ended August 24 after an unexpected 1 million barrel draw during the previous week, according to EIA data. Builds were observed in all PADDs, with PADDs 1 and 3 reporting the largest builds of 685,000 barrels and 1.4 million barrels, respectively. The EIA reported exports of 976,000 b/d last week, compared with Platts Analytics’ estimate of 891,000 b/d based on ship tracking data. Since June, EIA-reported weekly exports have averaged 919,000 b/d, 33% higher than year-ago exports of 690,000 b/d. Exports for the week ending August 31 are expected to be 825,000 b/d. In Northeast Asia, steam cracker demand for propane continues to soften as the naphtha-propane premium continues to narrow, reaching $43.75/mt on Friday.

Canadian Federal Court of Appeal Quashes Approval of Trans Mountain Pipeline Expansion

The Canadian Federal Court of Appeal ruled this morning against the granting of a permit to construct the Trans Mountain Expansion, a 590 MB/D increase over the current 300 MB/D capacity. The court determined that the National Energy Board’s (NEB) report to the federal cabinet was too flawed for the cabinet to make an informed decision and the federal government failed to adequately consult indigenous groups through the review process. The primary flaw in the NEB report was the failure to include analysis of increased tanker traffic on the marine environment. Also, the failure to adequately consult indigenous groups, which comes after a similar decision against the Northern Gateway project, clearly indicates a lack of alignment between the courts and the federal government on what constitutes meaningful consultation. The court ruled that the consultation framework selected by Canada was reasonable and sufficient. However, it indicated that as implemented the process failed to properly execute the framework due to inadequate engagement and insufficient exploration of possible accommodation steps.

Crop Tour Data Review

While Iowa producers spent the holiday weekend wondering if their combines will float, the extra day off allowed us to delve further into the 2018 Crop Tour data. As is custom, Pro Farmer released a detailed report to Tour scouts this past Friday afternoon which included some summary data, state-by-state comments, and a discussion around the two methodologies (standard and adjusted) they’ve used over the years when determining yields, especially in corn. The 2018 corn crop was the most mature crop that Platts Analytics has sampled since the drought-stricken year of 2012. In our opinion that’s a critical factor in determining the 2018 corn yield, especially coming off the 2017 growing season that saw one of the longest grain fill periods in history. While our hands on approach to assessing yields is not over until we get a sizeable number of harvest reports, it’s time to step out of the fields and crunch some numbers as we head to the September Crop Production report in just 8 days.

Strong Demand Boosts Resupply Requirements, Yet Pricing Still Expected to Fade

Coal demand remained robust over the month of August, with hot weather conditions pushing power demand and coal consumption higher than originally estimated in several key markets. However, stockpiles in China, India, and elsewhere have been able to absorb this demand, and inventories generally remain above prior-year levels. The spread between high-cv FOB Newcastle and the rest of the market has narrowed slightly but remains historically wide. The abundance of alternatives to high-cv Australian supply will pull prices lower although market rigidities may slow this inevitable convergence.

Financial Stresses Remain Low

This was a another very positive week, with the S&P 500 again gaining almost 1%, hitting another record high and closing above 2900. Some of the metrics were weaker, particularly those related to emerging market debt, with higher volatility in the equity VIX, along with the oil OVX. Commodities were slightly higher, but energy had a positive week and outperformed. The St Louis stress indicator moved lower for the week and remains low.

Battery storage growing quickly in Europe; the UK and Germany taking the lead The new biannual European Power Storage Outlook from Platts Analytics analyzes developments in power storage, and includes a five-year penetration outlook. This initial analysis focuses on the leading markets of the U.K. and Germany. Almost non-existent five years ago, battery storage has grown significantly thanks to steep cost reductions and market-rules changes. While total European battery installation is currently under 1 GW, we expect capacity to more than double by 2022, primarily located in the U.K. and Germany.

U.S. expected crude stock draws to be offset by products build

Total hydrocarbon inventories decreased by 1.7 MMB last week, which was in line with our expectations. Crude stocks continued to drop (-2.6 MMB) while aggregate clean products’ inventory drew by 2.7 MMB, due to unusually high distillate demand. Crude inventories at Cushing were almost flat, while PADD2 ones increased by 1.1 MMB, partially driven by higher inflows from Canada, which are expected to continue this week. Refinery maintenance is expected to start ramping up soon, which will reduce crude demand in PADD2 in September. For this week, Cushing stocks are anticipated to build by 0.8 MM barrels. EIA reported 10.5 MMB/D for the L48 and 462 MB/D for Alaska (from 429 MB/D during the previous week). In Alaska, the week-on-week growth was driven by the post-maintenance recovery of Alpine field.

US ethanol prices tumbled in August

US ethanol prices plummeted in August. Stocks remained above 23.0 million barrels and production was near a record high. Nearly 300 thousand comments were submitted on the proposed rule setting forth the biofuels mandates for 2019. A total of 1.71 billion RINs were generated in July, bringing the total for the first seven months of 2018 to 11.08 billion. Only about 33.6 thousand tons of sugarcane were processed in Brazil’s South-Central region during the first half of August, due to heavy rains. Mills continue to focus on ethanol manufacture due to strong sales and its greater profitability compared to sugar production. Cash margins are negative for many EU ethanol manufacturers, due mostly to high grain costs.

No Chinese Tariffs on US Crude Imports for Now, But Even If There Were, Impact would Be Limited

When China applied retaliatory tariffs on imports from the US on August 23, US crude oil was conspicuously absent from the list even though it was indicated as a potential target beforehand. Chinese purchases of US crude had grown rapidly, reaching 0.5 MMBD for June loaders, so any tariff if applied in some future round of trade dispute could be disruptive for crude trade flows. Additionally, the fear of such a possibility is already changing buying patterns. Nevertheless, Platts Analytics believes that any such tariffs would have limited impact on US crude pricing, total export volumes, or production – but buyers would rebalance.

2Q18 U.S. Producer Survey: Haynesville Outpaces Appalachia

US gas production continues to grow at an aggressive pace, with quarter-over-quarter gains of 1.5 Bcf/d in 2Q18. In percentage terms, quarter-over-quarter and year-over-year growth were 1.9% and 8.2%, respectively, lifting average US volumes to 78.2 Bcf/d for the quarter. Unsurprisingly, the largest contributing basins to this quarter’s increases were Appalachia, Haynesville, and the Permian, which grew 1.7 Bcf/d in aggregate. What was unusual this quarter, however, was that the Haynesville actually outpaced the Appalachian basin in growth, marking the first time this has occurred organically since 2012 (it happened in 3Q17, but this was due to storage and pipeline constraints in the Northeast). As for the Marcellus and Utica, production did increase by a not-insignificant 0.6 Bcf/d, but this lagged behind previous quarters. Overall, US production has continued its trajectory of healthy sequential growth, supported by a geographically diverse group of shale plays.

CA LCFS Prices Take a Pause Ahead of Key Amendments Vote

CA LCFS Credit prices have climbed considerably over 2018, though they lost ground in August. CARB expects to vote to adopt LCFS (and ADF) program changes on Sep 27th, to take effect Jan 2019. Key proposed LCFS changes include relaxing the near term trajectory and taking on a tighter 2030 target – along with increased crediting opportunities (for electricity, CCS, refinery projects, ZEV infrastructure, bio-jet fuel). While Platts Analytics’ modeling sees continued tightening balances, the risk of a cumulative program deficit is still years away, and the relatively large bank of credits should act as a buffer and limit pricing upside in the near term.

Nuclear issues and rising gas/carbon push NWE power to new highs

A steep rise in gas and carbon markets has underpinned further robust gains in power prices in August. While Dec-18 EUA carbon prices have climbed above €21/tCO2e, Clean Dark Spreads have been supported by an even bigger upward contribution from gas prices, in both the prompt and forward curve. Structural issues such as low N.W.E. gas storage levels, poor hydro stocks in the Nordic region and the implementation of the Market Stability Reserve in January 2019 will continue to support prices over the winter across European markets. Above all, nuclear risks in France and neighboring markets are reminders of the shortfalls observed in winter 2016 and 2017, but higher nuclear availability this year leaves some downside risk for French prices.

US June Oil Production Returns to Strong Growth

US crude and condensate actuals for June 2018 came in at 10,685 MB/D, 230 MB/D higher month-on-month, and 1,580 MB/D year-on-year. After two months of sluggish production growth, there was a return to strong sequential growth, mainly from Texas and the Gulf of Mexico. Compared to our latest August reference case, the actual came in 45 MB/D higher, mostly driven by a larger-than-expected recovery in the Gulf of Mexico. Looking ahead, we still forecast year-over-year growth in U.S. crude and condensate production of 1.4 MMB/D in 2018 and 0.95 MMB/D in 2019, roughly in line with our previous case.

The counter-seasonal rally in tanker rates in August portends stronger tanker markets over balance of 2018

A counter-seasonal rally in tanker rates in August portends stronger tanker markets over balance of 2018 supported by higher crude output led by Saudi Arabia, fleet demolitions, and idling of Iranian tonnage.

Spot, near-term forward prices collapse as temperatures moderate

Western on-peak markets recorded a second round of triple digit prices in early August with SoCal city gate gas prices reaching the mid $20s/MMBtu, but cooler conditions prevailed for the balance of the month driving full month prices below July averages at all hubs. While implied heat rates were also down from July’s peaks, with SP15 falling below 9,000, other hubs remained relatively firm. Strength in non-California markets reflected high weather-related demand, and in the case of the Northwest, below average runoff and ongoing problems at Colstrip. For the balance of 2018, relatively strong SoCal city gate basis will continue to depress SP15 heat rates and support those at hubs outside of California.

Another Bullish Stock Draw in June

On August 24, the EIA reported end-June electric power sector coal stockpiles of 121.5 MMst, a draw of 7.0 MMst month-on-month compared with a 6.2 MMst average June draw over the most recent five-year period. The June stockpile draw is the third month in a row when the EPS stockpile change has come in more bullish than the five-year average, one factor lending support to US coal prices.

Global Equities Still Positive, With More Record Highs in the U.S.

Global equities posted another solid gain of 0.7%, with the U.S. S&P 500 setting another record high and closing above 2,900. The strongest performing U.S. sector was technology and consumer discretionary, (+1.8%), while energy was fractionally lower. Internationally, emerging markets are still facing headwind, with the emerging market tracking index lower by -0.5%, and China lower by a similar amount.

US June 2018 DOE Monthly Revisions: Demand and Stocks

The EIA released their monthly June 2018 (PSM) US oil supply/demand data on Friday, along with revisions to their monthly data for all of 2017 through the PSA. June 2018 demand came in at 20.705 MMB/D, which was only an 80 MB/D downward adjustment from the weekly data. It was about 575 MB/D above what Platts Analytics had assumed, and the final total commercial stock level came in lower by 1.5 MMBbls compared to our assumption. Total demand gained 114 MB/D or 0.7% vs. the June 2017 final (PSA) figure. Gasoline demand grew a modest 26 MB/D or 0.3%. Kero-jet demand was the strongest single major product, with a gain of 92 MB/D, or 5.2%. Final end-June total commercial stocks stood at 1,207.2 MMBbls, which were 1.5 MMBbls lower than Platts Analytics had assumed. Products came in 3.2 MMBbls lower, while crude was higher by 1.8 MMBbls. Compared to June 2017 PSA data, total commercial stocks are now lower than year-ago by 123.5 MMBbls.

US ethanol stocks fell for the first time in five weeks

US ethanol production dropped 3 MB/D to 1,070 MB/D the week ending August 24. Stocks fell for the first time in five weeks, sinking by 198 thousand barrels to 23.1 million barrels. Inventories in the Gulf Coast dropped from a record high 5.4 million barrels to 5.1 million. For the first time in 38 weeks, imports were received in PADD V. Ethanol-blended gasoline production rose by 35 MB/D to 9,363 MB/D along with higher gasoline output.

North American Gas Five-Year Forecast - August

Broad ranging revisions on both the supply and demand side of the ledger drove reductions in Henry Hub prices across the 2019-2023 forecast timeframe.

Japan Finished Product Stocks Jump, Refining Margins Ease Back

After a noted improvement in refining margins, there was a retrenchment last week, along with a jump in finished product stocks. The increase was along seasonal trends, while crude oil runs continue to trend higher as maintenance winds down. Gasoil demand rebounded from its holiday low. The implied marketing margin for gasoline remains above its statistical highs, while gasoil/diesel is just below its high.

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